US election uncertainty could be a buying opportunity for South Korean government bonds

Investors and analysts say volatility due to the U.S. presidential election later this year could provide an opportunity to buy South Korean government bonds.

Political uncertainty around the November election could push up South Korea’s government bond yields and lead to lower domestic interest rates, making shorter-term securities more attractive, according to Mirae Asset Global Investments. Three-year government bond yields could fall by as much as 40 basis points by the end of the year, according to LS Securities.

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“Uncertainty surrounding the U.S. presidential election in November carries the risk of pushing up bond yields, especially for longer-term bonds,” said Choi Jin-young, head of fixed-income management at Mirae Asset Management Co. Once that uncertainty eases, bonds with maturities of less than three years will likely rise toward the end of the year on the possibility of a rate cut from the Bank of Korea, he said.

Choi said Mirae expects the three-year government bond yield to fall to 2.9% by the end of the year as the Bank of Korea cuts the three-year government bond yield by up to 75 basis points to 2.75% through its rate-cutting cycle. The yield fell to 3.05% this month, the lowest since August 2022.

Investors around the world are formulating strategies to take advantage of potential volatility arising from the US presidential elections, particularly the growing chances of Donald Trump’s reelection. The so-called “Trump trade” is expected to boost the dollar and weigh on riskier assets, including emerging markets.

South Korean investors have another dimension to consider, with the central bank expected to cut interest rates at least once by the end of the year. Traders are still pricing in a policy shift, even though Bank of Korea Governor Lee Chang-yong tried to temper those expectations last week when policymakers kept their key interest rate unchanged at 3.5%.

The bank’s renewed concern about financial imbalances could push back the timing of the first rate cut from August to October, but “it’s only the timing that’s being postponed,” said Woo Hye-young, a bond analyst at LS Securities in Seoul. Two rate cuts could still happen this year, one in October and one in November, he said.

Other local funds are more cautious.

Kang Jin-won, director of fixed income at KB Asset Management Co., said he is taking a wait-and-see stance to see how South Korea’s yield curve reacts to expectations of a rate cut. There are several other factors that could move the market, including the won, household debt levels and the possible inclusion of South Korean government bonds in the FTSE Russell World Government Bond Index, he said.

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